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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Keystone XL Does Not Make Sense Anymore

Pipeline

Canada’s oil industry is facing a dilemma – three major proposed pipelines but perhaps only room enough for two of them.

For years, the oil industry in Canada has been fighting for expanded pipeline capacity. Landlocked Alberta has had trouble getting its oil to market. Every direction except north has been seriously considered, with TransCanada, Enbridge and Kinder Morgan jockeying to advance their competing projects to service Alberta. All of these projects have been bogged down by a combination of the federal approval process, environmental protest and opposition from First Nations.

The Keystone XL pipeline saga is nearly a decade old and there is still no steel in the ground. Over the years, Canadian heavy oil has been forced to sell at a discount because of the shortage of pipeline space. In fact, the lack of pipeline capacity has been singled out as one of the top threats to expanded oil sands production. That is exactly why environmental groups targeted Keystone XL years ago, and it is exactly why the oil industry says building pipelines is its top priority.

Canada’s energy future relies on our ability to get Canadian oil and gas to the people who need it,” Tim McMillan, president and CEO of the Canadian Association of Petroleum Producers (CAPP) said last year. “Connecting Canadian supply to new and growing markets abroad, safely and competitively, is a top priority.” Canadian pipelines can carry 4 million barrels of oil per day, which is just a bit above the actual oil flows in 2015 at 3.981 mb/d, according to CAPP. Without more pipelines, oil sands companies cannot expand their operations. The industry is targeting an additional 850,000 bpd over the next five years. Related: U.S. Shale Faces A Workforce Shortage

In late 2015, the issue looked like it was going nowhere. The Obama administration had just killed off the Keystone XL project, rejecting it on climate grounds. Alternative routes also struggled for acceptance. Moreover, falling oil prices forced oil companies to cancel or delay several dozen oil sands projects.

But a little more than a year later and Alberta finds itself in a different situation: three viable pipelines from three different companies, all of which are determined to move forward in a market that might only need two of them.

In the fourth quarter of last year, the Canadian government gave federal approval to two major pipeline expansions: the Trans Mountain Expansion and the Line 3 replacement. Kinder Morgan’s Trans Mountain Expansion project will see the construction of a twin line that will run parallel to an existing pipeline from Alberta to the Pacific Coast. The expansion will nearly triple its capacity from 300,000 to 890,000 bpd. Enbridge also received approval for the replacement and overhaul of its Line 3 pipeline from Alberta to Wisconsin in the United States. The replacement of the pipeline will nearly double its carrying capacity to 760,000 bpd.

Then there is the Keystone XL Pipeline, which, like a zombie, refuses to die. The election of President Donald Trump brought the project, left for dead by President Obama, back to life. TransCanada hopes to move forward on the project.

But according to Enbridge, there may not be a market for all three pipelines. "If you look at the supply profile and you look at our expansion replacement capacity for Line 3 and one other pipeline, that should suffice based on the current supply outlook, out to at least mid-next decade," Enbridge’s CEO Al Monaco said on a fourth quarter earnings call. Naturally, Monaco wants his company’s Line 3 to be one of the two pipelines to move forward. Related: Will Trump Send Oil Prices Crashing?

The obvious odd man out would be Keystone XL despite the support from the Trump administration. CAPP expects additional Canadian oil output on the order of 850,000 bpd 2021; the IEA largely agrees, projecting a 900,000 bpd increase by 2022. That lines up nicely with the capacity additions from the Trans Mountain expansion (+590,000 bpd) and the Line 3 expansion (roughly +370,000), which would add just under 1 mb/d in new pipeline capacity. Keystone XL, a nearly 1,200-mile pipeline, would add 830,000 in new capacity.

More importantly, the Trans Mountain and Line 3 expansions would be adding new pipes on existing routes, not bulldozing new territory. They would not have the massive seizure of public and private land problems that Keystone XL still has to go through. The two expansions would literally just be installing new pipeline where existing and older pipeline is currently located. Similarly, those projects face fewer legal hurdles than Keystone XL, which still has to overcome local lawsuits.

Thus, the comments from Enbridge’s CEO, warning that not all three pipelines will get built, is worth noting. Wood Mackenzie agrees. "We definitely need two of these pipelines by around 2025 and after that it depends on the supply outlook," Wood Mackenzie analyst Mark Oberstoetter said, according to Reuters. "There's not an evident need to get three or four pipelines built."

So, Keystone XL might be back from the dead, but it is unclear for how long.

By Nick Cunningham of Oilprice.com

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  • Naomi on March 14 2017 said:
    Canada can ramp supply so long as the price of oil exceeds cost of production. Twenty years ago the Canada cost of production was $40/bbl.
  • rjs on March 14 2017 said:
    not only does the Keystone XL not make make sense, the tar sands expansion this article suggests doesnt make sense either...
    most figures i’ve seen indicate they need $50 US oil prices just to operate the extraction facilities now in existence, without any expansion…Keystone was originally proposed at a time when oil prices were twice what they are now, but 64 of the tar sands projects that were on the drawing board when oil prices first started falling have since been cancelled, with many of of the oil companies involved taking large losses, so the oil that was to fill the Keystone will no longer be there if the pipeline were to be completed…about a year ago, IHS estimated that a new greenfield oil sands mine (without an upgrader) required a WTI price between $85 to $95 per barrel on average to breakeven…a month ago, petrogeologist and oil analyst Art Berman writing here at oilprice.com also showed that it would take at least $85 oil prices for 10 years to develop enough new oil sand projects to fill the Keystone XL……the major oil companies already see the writing on the wall; just last week, Shell decided to divest nearly all of its Canadian oil sands interests in exchange for $7.25 billion, and Marathon announced an agreement to sell its Canadian subsidiary, including their interest in the Athabasca Oil Sands, and use the proceeds to buy Permian basin assets in Texas…all the deep pocketed major oil companies are getting out of the oil sands, and the small companies left with an interest there do not have the capital wherewithal to expand…
  • John Scior on March 15 2017 said:
    Interesting article. One thing to keep in mind is that while at this time our oil supplies seem secured, the world situation is an ever changing landscape and supplies from say places such as Libya, Nigeria, Venezuela may not always be at our disposal. Looking farther into the future ( as previous commentators suggest ) as the low hanging fruit of oil supplies is diminished overseas, the price of oil will go up and alternate sources such as fracking and tar sands will become more economically feasible. It would be nice if we could have the existing pipeline infrastructure if it can be developed in an environmentally sound way and with consent and consideration of the people who the pipeline will directly impact. We should not use a heavy hand when dealing with protesters who have legitimate concerns about the impact that these pipelines may have and an oil pipeline breakage or disruption is not only devastating to the people directly impacted but also to the oil companies as well as consumers who suffer price spikes. A safe solution can be found that takes into the consideration of all parties.
  • RJE on March 15 2017 said:
    RJS ... you need to get your facts straight. The company that bought out Shell has a history of turning under or marginal performers into money makers.

    The reason Canadian producers don't make a lot of money is because we pay about a $14-18 tax or discount to sell to the US. If they weren't burned by an incompetent "carbon tax" or American discounts, they would be more than competitive with the other world suppliers.

    Once we overcome US and Saudi's funding of the opposition of our own pipelines, we will make it to one or both of our coasts and we will be quite competitive with the rest of the world.

    Now that sounds to me what the US and Saudi's wouldn't want.

    Here's to Canada getting back into the game!
  • DocScience on March 19 2017 said:
    As long as there is a million barrels/day of Alberta oil travelling by rail, there is a compelling argument for the pipeline.

    Safety ALONE demands it.

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